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For an enhanced HTML version of the Money Daily, visit http://moneydaily.com.
Weekend, August 16-17, 1997
Never mind the hype: The great tax cut of 1997 is unnecessary, inequitable, and just
plain dumb
A Briefing Room special
by Ann Reilly Dowd
I love a tax cut as much as the next guy. But this one is just
plain dumb. Not only is it economically unnecessary, it's
inequitable and maddeningly complex, imposing on average
middle-class taxpayers the kind of compliance headaches
once reserved for corporations and the very rich. The truth
is this whole noisy exercise was really never about
balancing the budget or spurring growth, but about
Democrats and Republicans grabbing credit for an incredible
shrinking deficit and divvying up the spoils.
At best, this tax cut is economically superfluous. With the
Gross Domestic Product growing at 3.6% and unemployment
at an historic 4.8% low, there was certainly no need for a
tax cut to spur short term economic growth. Indeed, the only
reason that financial markets are not terrified that the plan
will overheat the economy and lead to a resurgence of
inflation is that the tax cut is relatively small -- only $95
billion over five years, or an average annual 0.25% of GDP.
By contrast, Ronald Reagan's 1981 tax cut was $749 billion
over 3 years, or an average annual 8% of GDP. In a $7.6
trillion economy, DRI-McGraw Hill chief economist Roger
Brinner aptly calls this year's tax cut "background noise."
Even this relatively modest tax cut, however, has its price.
Combined with spending increases championed by the
Democrats, the tax cuts actually slow the march towards a
balanced budget, which was already well underway, thanks
to robust growth and a booming stock market. Indeed, the
Committee For A Responsible Federal Budget, a nonpartisan
budget watchdog group, estimates that the so-called
balanced budget deal will produce over $100 billion more in
cumulative deficits than would have been the case had
Congress and the President simply gone fishing. Only in
Washington!
What's more, Congress and the President blew a rare
opportunity to slow the growth of Medicare and Social
Security, which left unchecked will send deficits or taxes
skyward again after 2011 when the baby boomers begin
retiring. Although the Senate swallowed hard and passed a
gradual increase in the eligibility age for Medicare and
higher premiums for wealthier retirees -- and President
Clinton bravely supported the latter, House Republicans,
fearful of being pilloried by Democratic challengers in the
1998 elections, wimped out big time. Then, to make matters
worse, Congress enacted tax cuts on savings, investments
and estates whose costs are expected to explode at the very
same time as Medicare and Social Security. "This is just
another example of our taking now and stealing from our
kids," says Boston University economist Larry Kotlikoff.
"It's a colossal mistake."
To make matters worse, this bill doesn't even make a
pretense of fairness. At least Reagan's tax cut was an
across-the-board reduction in rates that treated people
with similar incomes the same. This tax cut divides the
have and the have nots by whether they smoke, fly, have
kids, go to college and invest in the stock market. According
to this bill, the ideal American is a nonsmoking parent who
plans to send his kids to college and invests in equities. The
lowest of the low: a childless smoker who flies a lot and
has no money to save or invest. Whatever happened to the
lofty notion that the tax code should simply raise revenues
to finance the government, not pick winners and losers?
But the worst thing about this measly tax cut is how
maddeningly complex it makes the tax code for average
Americans. Take the new savings incentives. On their face,
they are very attractive. More taxpayers will be eligible for
deductible Individual Retirement Accounts (couples with
Adjusted Gross Incomes under $80,000 by 2007, and singles
under $50,000 by 2005). In addition, there will be a new
Roth IRA, which offers no upfront deduction but allows your
investment to grow and be withdrawn tax-free at
retirement or for a first time home purchase. Also coming
soon: a new Education Savings Account, which allows
couples with AGIs under $150,000 (single parents under
$95,000) to invest up to $500 a year for every child under
18 and withdraw the money tax- and penalty-free after five
years for higher education expenses. But figuring out which
IRA to invest in, and whether to roll over an old deductible
IRA into a new Roth IRA will send even the savviest
taxpayers screaming for a financial planner. And beware of
Education Savings Accounts: the money you accumulate
there could make you ineligible for more financial aid. Quips
former Congressional Budget Office Director Robert
Reischauer: "This is the H&R Block Full Employment Act."
In the short term, whether you win or lose from this lunatic
bill depends on whether you smoke, how fertile you are --
and how smart is your tax adviser. In the long run, the best
thing it could do is light a prairie fire across America for
real reform that produces a simpler, fairer and more pro-
growth tax code -- and lets you spend your hard-earned
money on yourself, not the tax man ... or your accountant.
Editor's note: The opinions expressed in this and all Briefing
Room columns are the writer's and don't necessarily reflect
those of Money Magazine.
Web-formation:
Got something to say? Post your comments in Money
Online's Briefing Room
(www.pathfinder.com/cgi-bin/boards/read/267/3).
JW
abprosys@xxxxxxx
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